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Headwinds That Might Dent Airline Industry Momentum

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The fact that the Zacks Airline industry declined 2.5% in the first quarter of the year highlights the fact the sector is not bereft of headwinds, despite positives such as increasing financial prosperity and the new tax law.

Let’s take a look at the factors responsible for the disappointing price performance.

Weather-Related Disruptions Rule

Stocks in the airline space have been hit repeatedly by inclement weather this year. Weather-related disruptions cripple airline operations, leading to multiple flights being cancelled. Apart from Winter Storm Grayson in January, successive nor’easters in March disrupted airline operations significantly due to multiple flight cancellations.

In fact, the month of March has reportedly seen more than 10,000 flights being called off due to successive nor’easters. Notably, this was the worst March in five years in terms of flight cancellations.

The increase in the number of flight cancellations resulted in significant revenue loss for airline operators and this is likely to dent the top-line performance of carriers in the first quarter. 

According to the Air Travel Consumer Report unveiled by the U.S. Department of Transportation, the number of cancellations increased during January 2018. In fact, the rate of cancelled scheduled domestic flights increased to 3% from 2% and 1.2% in January and December 2017, respectively.

Public Relations Fiascoes

Carriers such as United Continental Holdings, Inc. (UAL - Free Report) and Southwest Airlines Co. (LUV - Free Report) have been hurt by issues pertaining to animals on their flights. In February, an unfortunate child-related incident occurred on a Southwest Airlines flight (Phoenix-to-Portland) when a dog bit the girl on the plane. Southwest started reviewing its policy pertaining to onboard service animals, even before the occurrence of incident.

The dog fiasco at one of the flights of United Airlines — United Continental’s subsidiary — earned the carrier rebuke from all corners. In fact, the incident which resulted in the tragic death of a black French bulldog puppy on one of its flights on Mar 12, 2018, did not go unnoticed by lawmakers in the United States.

According to a Reuters report, U.S. senators John Kennedy and Catherine Cortez Masto have introduced a legislation aimed at preventing airlines from putting live animals in overhead bins. The senators have also proposed the imposition of fines on violations of the animal-friendly measure. This apart, the transportation of a Kansas-bound German shepherd to Japan also dented its market reputation with respect to its pet-handling policy.

Markedly, these two mishaps were the reasons behind United Airlines’ decision to suspend its pet cargo travel service. Even in 2017, United Airlines had the dubious distinction of the highest number of animal deaths on its flights.

The mishandling of animals has caused carriers like Delta Air Lines, Inc. (DAL - Free Report) to change their policy on animals on their flights. Markedly, from Mar 1, 2018 the concerned passengers on Delta flights would need to furnish documents underlining passengers’ need for carrying the animal on the flight. Also, the person has to provide proof related to its training and vaccinations within 48 hours before the flight.

Delta carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

High Costs Likely to Hurt Bottom Line in Q1

Crude oil prices are on their way back up after falling sharply from $100 a barrel in 2014, to a low of $30 in 2016. Currently, oil prices are hovering around the $66 a barrel mark. Mounting tensions related to Syria contributed to the upsurge. As fuel costs represent one of the largest input costs for airline companies, the rise in oil prices naturally pushed up operating expenses, in turn, hurting the bottom line of carriers. With fuel costs moving northward, bottom-line growth of carriers is likely to be limited in the first quarter.

Apart from high fuel costs, expenses on the labor front have also been increasing over the past few quarters due to the various labor deals inked by carriers. High labor costs are likely to dent the bottom-line growth of most carriers in the first quarter.

Other Headwinds Plaguing Airlines

The long-standing pay-related dispute between European low-cost carrier, Ryanair Holdings plc (RYAAY - Free Report) , and its pilots shows no signs of ending. According to a Reuters report, the European Employee Representative Council — formed in 2016 by pilots of the Irish carrier — demanded the resignation of Ryanair CEO Michael O‘Leary.

The unofficial pan-European body was of the opinion that O‘Leary had failed to tackle the issue effectively, resulting in many pilots quitting the company. Ryanair has, however, dismissed this demand.

Moreover, Southwest’s bleak view unveiled late last month, with respect to operating revenue per available seat miles (RASM), for first-quarter also dented stocks in the space. The Dallas-based carrier attributed the downbeat forecast to pricing pressure and lower-than-expected demand for air travel due to the timing of the spring break holidays.

Furthermore, the U.S. Department of Transportation’s (DOT) tentative decision to grant permission to five U.S.-based leading carriers to operate new scheduled flights to Havana has led to fears of competition intensifying among leading carriers as Havana is popular tourist spot. In fact, in a bid to attract customers, U.S. carriers may face a price war. To match the low fares of carriers like JetBlue Airways Corp. (JBLU - Free Report) and Southwest, legacy carriers namely Delta and American Airlines Group (AAL - Free Report) might follow suit which is likely to trigger a price war.

Only time will tell whether the fears turn into reality, once the flights take effect following the finalization of this tentative decision. Moreover, the safety-related allegations leveled against Allegiant Travel Company (ALGT - Free Report) by CBS’ "60 Minutes" also raise concerns. The allegations are being investigated.

Investors will also closely watch first-quarter results of the sector participants to find out whether capacity-related woes, which have been hurting airlines for quite some time, show up again in the current reporting cycle. 

Check out our latest Airline Industry Outlook for more news on the current state of affairs in this market from an earnings perspective, and how the trend looks ahead for this important sector at the moment.

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